Asset allocation is as much an art as a science. If you ask 20 different financial planners how you should allocate your assets, you will probably get 20 different answers – even with the assumption that all things are equal (total assets, income, age, and other factors).
There are, of course, some similarities. Most financial planners recommend a diversification strategy that incorporates a range of asset classes such as stocks, bonds, and other investments that meets your risk tolerance and investment goals. But the details of how to get there often differ.
Today I have a reader question about asset allocation and why many financial planners recommend a majority of assets be allocated in the US stock market.
Should You Invest Primarily in the US Stock Market?
This question comes from a regular reader named Dan:
Question: I have a general question on investing that I thought I would send your way: I have been meeting lately with a financial planner regarding a 401k rollover. The subject of domestic vs. international allocation came up in one of our discussions. He, like most advisers in the U.S., believe in putting the majority of your stock allocation in the US stock market and a smaller percentage into foreign funds (I agree with this approach). But why is this the conventional wisdom? Is it because the U.S. is still the largest economy in the world with most of the best and brightest companies? Or are we being homers to some extent?
What about a Japanese man about my age also planning for retirement – would his Japanese investor tell him the same thing: put most of your stock in U.S. with a smaller percentage in Euro and Pacific Rim? Or would he advise him to invest mostly in Pacific with a smaller percentage in U.S.? If the former, then he agrees with U.S. investors. If the latter, then who’s being the smart investor and who’s being the homer? Disregarding taxes, all things should be equal: It shouldn’t matter where you live – if the S&P goes up 10%, it goes up 10% for everyone. Therefore everyone should have a similar investment strategy given the same financial goal.
Domestic vs. International Asset Allocation – Which is Best?
I don’t have a clear answer for this question. My initial response is that there are probably several factors at play, mostly related to the currency the investments are based in, familiarity with the companies and investments, and possibly taxes. But it could just be because that is how most people have always done it.
What are your thoughts about asset allocation? Should the majority of your investments should be based in the US? What percentage should be US based?
Image source: Wikipedia.